The impact of the global economic crisis of 2008 on earnings quality in Mexico

2019 ◽  
Vol 9 (3) ◽  
pp. 407-421
Author(s):  
Jose Miranda-Lopez ◽  
Ivan Valdovinos-Hernandez
Keyword(s):  
Earnings Management ◽  
Economic Crisis ◽  
Earnings Quality ◽  
Accounting Standards ◽  
Previous Literature ◽  
Income Smoothing ◽  
Accounting Quality ◽  
Content Type ◽  
Global Economic Crisis

Purpose The purpose of this paper is to examine the earnings quality of companies listed on Mexico’s primary stock market, the Bolsa Mexicana de Valores (Bolsa) before and during the global economic crisis of 2008. Previous research has shown that these economic events can have potentially conflicting effects on the quality of earnings of listed companies in capital markets around the world. Design/methodology/approach This paper operationalizes earnings quality based on earnings management. Therefore, four constructs to proxy for earnings quality are developed from previous literature, and multiple regression analysis along with tests of differences across two time periods, 2005–2007 and 2008–2010, are used to determine if there is a significant change in the accounting quality of companies listed on the Bolsa before and after the start of the global economic crisis. Findings Results indicate a statistically significant decrease of earnings quality on three out of the four constructs used to proxy for earnings management. There is only one construct in this category that shows a significant increase of earnings quality. Research limitations/implications There are different number of constructs and methodologies used to test for earnings quality. This study draws on four different constructs on two dimensions of earnings quality from previous literature, but other methodologies and constructs can potentially be used as well, such as discretionary accruals. Furthermore, there is a chance that there can be confounding factors affecting the results of this study besides the effects of the global economic crisis. Finally, the sample used in this study comprises non-financial public companies listed on the Bolsa, which can affect the generalization of the results to countries other than Mexico. Practical implications The results of this study can be of interest to Mexican and foreign investors, standard setters and regulators of the Bolsa, as the results show a strong incentive to manage companies’ earnings using income smoothing in an emerging economy during an economic crisis even after converging to a higher-quality set of accounting standards. Results can also be of interests to investors and regulators in other Latin-American countries with economies similar to that of Mexico. Originality/value This is the first study to test the quality of earnings of Mexican companies before and during the global economic crisis of 2008. Thus, this study contributes to the accounting quality literature by offering evidence showing a significant increase of income smoothing during the global economic crisis for companies listed in a developing economy with a relevant history of economic crises, even when these companies were using recently converged, higher-quality accounting standards.

International accounting standards and accounting quality in code-law countries

2016 ◽  
Vol 24 (1) ◽  
pp. 41-59 ◽  
Author(s):  
Ibrahim El-Sayed Ebaid
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Management Practice ◽  
Accounting Standards ◽  
Accounting System ◽  
Accounting Quality ◽  
Regulatory Requirement ◽  
Content Type ◽  
Set Up ◽  
Egyptian Government

Purpose – This study aims to examine whether the adoption of International Financial Reporting Standards (IFRS) leads to accounting quality improvements in Egypt as a code-law country. In particular, the study examines earnings management, the construct often used to assess accounting quality. Design/methodology/approach – The study compares earnings management practice for Egyptian listed companies before (2000-2006) and after (2007-2009) the adoption of IFRS. Findings – The findings of the study reveal that accounting quality, as measured by earnings management, has decreased in post-adoption period compared to pre-adoption period. IFRS are set up to provide high-quality financial reporting. However, this cannot be achieved solely by a regulatory requirement to follow. The accounting system is a complementary component of the country’s overall institutional system. Institutional improvements did not simultaneously take place by the Egyptian government around the adoption of IFRS. The Egyptian government did not introduce a more effective enforcement system, mandatory corporate governance regulations, investor protection mechanisms and sufficient institutional knowledge of IFRS during that period. Thus, even if IFRS are higher quality standards, the institutional features of Egyptian market could eliminate any improvement in accounting quality arising from adopting IFRS. Research/limitations/implications – The results of the study are consistent with prior research suggesting that the adoption of IFRS, which are generally perceived to be of higher quality than domestic standards, does not necessarily lead to higher accounting quality in code-law countries like Egypt. The overall results indicate that incentives dominate accounting standards in determining accounting quality in Egypt. Originality/value – The main reason why countries adopt IFRS invariably is to improve accounting quality. It is, therefore, of interest to ascertain if this goal has been met, especially, in code-law countries such as Egypt.

Do high-quality standards ensure higher accounting quality? A study in India

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Manish Bansal ◽  
Ashish Garg
Keyword(s):  
Value Relevance ◽  
Accounting Standards ◽  
Quality Standards ◽  
Discretionary Accruals ◽  
Accounting Quality ◽  
High Quality ◽  
Content Type ◽  
Earnings Smoothing ◽  
The Impact

Purpose The study aims to investigate the impact of International Financial Reporting Standards (IFRS)-converged standards (Indian Accounting Standards (INAS)) on the accounting quality of Indian firms. The phased manner approach of implementing INAS provides us a unique setting to investigate the issue in India. Design/methodology/approach The study used difference-in-difference (DiD) methodology, where the accounting quality is compared between test firms and benchmark firms during the pre-and post-INAS adoption period. Accounting quality is operationalized through four different constructs, namely, earnings smoothing, discretionary accruals, earnings timeliness and value relevance of earnings. Findings The findings deduced from the empirical results demonstrate that accounting quality has been significantly reduced after the adoption of INAS. In particular, results show that the degree of earnings smoothing, and the magnitude of discretionary accruals have been increased among test firms in the post-adoption year. Besides, findings provide evidence that timely recognition of losses and value relevance of earnings has been reduced for test firms relative to benchmark firms after the adoption of INAS. Practical implications The results suggest that the mere adoption of high-quality standards does not ensure higher accounting quality in countries with a weaker enforcement mechanism. Hence, stringent enforcement mechanisms are needed to ensure full compliance with accounting standards. This study serves as a case study for other emerging countries that are in the process of IFRS convergence and make them aware of the unintended consequences of IFRS adoption. Originality/value Indian authorities implemented INAS in a phased manner that provides a unique setting to use DiD methodology. DiD helps to control the impact of concurrent economic shocks, while examining the impact of the particular regulatory shock. Besides, this is the first attempt to investigate the impact of INAS on the accounting quality of Indian firms.

Did Japanese-SOX have an impact on earnings management and earnings quality?

2015 ◽  
Vol 30 (4/5) ◽  
pp. 482-510 ◽  
Author(s):  
Masumi Nakashima ◽  
David A. Ziebart
Keyword(s):  
Corporate Governance ◽  
Earnings Management ◽  
Reporting System ◽  
Earnings Quality ◽  
Business Environment ◽  
Real Earnings Management ◽  
Material Weakness ◽  
Content Type ◽  
Accruals Management

Purpose – The purpose of this paper is to investigate whether Japanese Sarbanes – Oxley Act (J-SOX) impacted earnings management and earnings quality of public firms in Japan. Design/methodology/approach – This archival study compares earnings management and earnings quality of firms that disclose at least one material weakness with a sample matched on size and industry without a material weakness. Findings – The authors investigate whether the differences in regulations, corporate governance and regulatory environment acceptance influence earnings management and earnings management of Japanese listed firms, relative to findings in the USA. They found the Japanese results to be slightly different from the results found in previous USA studies. First, the time-series observations suggest that while accruals management and real earnings management remained unchanged for control firms, accruals management and real earnings management increased for material weaknesses disclosing firms following J-SOX. The regression analyses suggest that accruals management for both the groups is significant in the pre-and post-J-SOX periods, but that real earnings management declined for both the groups post-J-SOX. Second, while, both accruals quality and accuracy of cash flow predictions improved in the post-J-SOX period. Research limitations/implications – The sample of Japanese firms disclosing a material weakness is small because the number of firms that disclose internal control deficiencies is decreasing in Japan. The authors have no evidence that their results are not generalizable to a larger sample and leave this for future research. Practical implications – The authors provide evidence that J-SOX, which does not have a direct reporting system, does not constrain earnings management. Their results drive the regulator to reconsider whether the reporting system works in the Japanese business environment. Additionally, their results show that J-SOX has no effect on earnings management; thus, regulators need to reconsider the governance function of directors and internal auditors. This paper communicates to the world how J-SOX works in Japan through changes in earnings quality and management post J-SOX and the root problems. Originality/value – This paper is the first (of which the authors are aware) to examine whether J-SOX impacted both earnings management and earnings quality in Japan. This paper discusses how the differences in regulations and corporate governance as well as the differences between USA-SOX and J-SOX may explain the results observed in Japan. This paper provides results regarding whether J-SOX improved earnings quality.

The quality of reported numbers by the management

2014 ◽  
Vol 21 (3) ◽  
pp. 355-376 ◽  
Author(s):  
Sandeep Goel
Keyword(s):  
Private Sector ◽  
Earnings Management ◽  
Earnings Quality ◽  
Quality Measurement ◽  
Research Approach ◽  
Profit Model ◽  
Content Type ◽  
Creative Accounting ◽  
Measurement Tools

Purpose – The present article aims to test the fairness of reported numbers by the management and examine the magnitude of earnings management in Indian corporate enterprises by testing the Beneish profit model. This paper contributes by further verifying the results of the Beneish model by applying the concept of “quality of earnings and revenue” to the sample units. Quality of reported numbers by the management has always been a concern for a common shareholder on account of the underlying proposition of earnings management. There are numerous models available to test the quality of these numbers, i.e. presence of earnings management. Most of these models are accrual based which have been subject to significant criticism due to estimate-based approach. The Beneish profit model, which combines accruals and financial ratios and/or indexes, is one such alternative to the accruals approach. Design/methodology/approach – A “case-based” research approach has been followed here for analyzing Indian corporate enterprises on select basis. The Beneish profit model, developed specifically for testing earnings quality and detecting earnings management, has been used in the present study. The data analysis has been well supported by “quality measurement tools”. Findings – An examination of the units shows the need for improvement in the quality of earnings in the sample units, and there is a presence of earnings management in them. Research limitations/implications – The present study could be confined to only top 12 profit-making corporate enterprises in the private sector in India, leaving all other enterprises due to data non-availability. Of 25 enterprises, there were public sector undertakings too which had to be excluded. Practical implications – The present study was confined to only 12 profit-making corporate enterprises in the private sector due to sampling requirements; the scope of the units can be extended to other units in diverse sectors with different size and scale of operations. It would further verify the present discussion and also provide future enlightenment on the issue of earnings management. Originality/value – It is an original article which explores creative accounting practices for better shareholders’ interest.

Gender diversity, financial expertise and its effects on accounting quality

2017 ◽  
Vol 55 (2) ◽  
pp. 347-382 ◽  
Author(s):  
Isabel-Maria García-Sánchez ◽  
Jennifer Martínez-Ferrero ◽  
Emma García-Meca
Keyword(s):  
Earnings Quality ◽  
Investor Protection ◽  
Gender Diversity ◽  
Accounting Conservatism ◽  
Accounting Quality ◽  
Content Type ◽  
Board Characteristics ◽  
Financial Expertise

Purpose The purpose of this paper is to analyze whether gender diversity on board and financial expertise on audit committee affect accounting conservatism in banking sector. Additionally, the authors focus on the effects of board characteristics on bank earnings quality and examine their effects on earnings persistence. Design/methodology/approach The authors use a large sample of 159 banks from nine different countries from the period 2004-2010. The authors study whether the differences in the timeliness of earnings to bad news and earnings quality across governance structures of banks are driven by differences across investor protection and bank regulation levels in banks. Findings The findings confirm the monitoring role of both female and financial experts, noting a positive effect of them on accounting conservatism and earnings quality in banks. According to the institutional characteristics, the results suggest the complementary role of banking regulation and investor protection levels in these effects, noting that in contexts of higher regulatory and greater investor protection environments, gender diversity and financial expertise on boards have more influence on the conservatism and earnings quality of banks. Originality/value The authors contribute to both the accounting quality literature and the corporate governance literature by identifying board characteristics that are associated with higher conservatism and quality of earnings in banks around the world. In addition, this study also contributes to the ethics literature by highlighting the benefits of gender diversity and financial expertise in upholding the integrity of financial reporting. Moreover, this paper adds to prior literature about board of directors and accounting quality by identifying additional complementary factors – bank regulation and investor protection – and by focusing on a specific industry, the banking industry.

IFRS and accounting quality: legal origin, regional, and disclosure impacts

2016 ◽  
Vol 24 (3) ◽  
pp. 296-316 ◽  
Author(s):  
Ajit Dayanandan ◽  
Han Donker ◽  
Mike Ivanof ◽  
Gökhan Karahan
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Common Law ◽  
Civil Law ◽  
Discretionary Accruals ◽  
Income Smoothing ◽  
Content Type ◽  
The World ◽  
The Impact

Purpose The purpose of this study is to examine whether the quality of financial reporting has improved after the adoption of International Financial Reporting Standards (IFRS) in Europe and across the world. The study investigates the impact of IFRS on income smoothing and earnings management in different geographic regions under different legal origins and disclosure environments. Design/methodology/approach To measure income smoothing in the pre- and post-IFRS periods, the authors use the coefficient of variation and the panel unit root model proposed by Im et al. (2003) for testing whether net income is stationary throughout the sample period. The study uses a dynamic panel estimation framework, as it captures the dynamics of IFRS on discretionary accruals efficiently. Discretionary accruals are used to measure earnings management. Findings The results suggest that the adoption of high quality standards, such as IFRS, reduces income smoothing and earnings management. In addition, the study finds that earnings management has decreased in the post-IFRS period, in particular, for French and Scandinavian civil law countries, but not for German civil law countries and common law countries. The latter can be explained by the fact that common law countries have strong investor protection laws, strict law enforcement and high disclosure levels of financial information. The study also finds empirical evidence that the adoption of IFRS reduces earnings management in countries with high levels of financial disclosure. Overall, the study shows that the adoption of IFRS improved the quality of financial reporting. Originality/value This study is useful for accounting standard setters across the world, including those countries that have not yet decided to adopt IFRS. The study contributes to the literature by examining the adoption of IFRS in income smoothing and earnings management under different legal regimes and disclosure environments by using advanced empirical methodologies.

scholarly journals Earnings management motives and firm value following mandatory IFRS adoption – evidence from Canadian companies

2016 ◽  
Vol 13 (2) ◽  
pp. 280-295 ◽  
Author(s):  
Raymond Leung
Keyword(s):  
Earnings Management ◽  
Firm Value ◽  
Earnings Quality ◽  
Economic Consequences ◽  
Accounting Quality ◽  
Firm Level ◽  
Protection Mechanism ◽  
Ifrs Adoption ◽  
Legal Enforcement

When Canada already has a set of well- established legal enforcement and investor protection mechanism to control earnings management; and the quality of Canadian GAAP is high, I examine if the accounting quality for Canada can still be improved since its adoption of IFRS mandatorily in 2011. The extant literature argues that IFRS adoption benefits firms domiciled in countries with strong legal and financial institutions. However, when the quality of IFRS is as good as the local standards for many Anglo-Saxon countries such as Canada, it is questionable for these countries to receive substantial economic consequences. Following the literature, I estimate a set of comprehensive measurements of earnings management as the proxies of accounting quality. Empirically, I document evidence that even though the results are mixed, there are still certain significant improvements in accounting quality. However, I find that firms issuing more equities are motivated to associate with lower earnings quality. Also, firms engaging in two distinct strategic directions (prospector vs. defender) have systemically dissimilar effects on earnings quality in IFRS adoption. Finally, I document evidence that firm value following IFRS adoption has been increased, but at the expense of lower accounting quality. Overall, my study shed some lights into the literature that accounting standards per se is not sufficient to ensure a uniform-level of accounting quality because firm-level earnings management motives are important factors too.

scholarly journals Methodological Analysis of Accounting Quality : Empirical Approach to DeAngelo’s Model and the Modified Jones Model

2021 ◽  
Vol 66 (2) ◽  
pp. 195-210
Author(s):  
Ervin Denich
Keyword(s):  
Decision Making ◽  
Earnings Management ◽  
Earnings Quality ◽  
Financial Statements ◽  
Empirical Approach ◽  
Accounting Quality ◽  
Manufacturing Companies ◽  
Jones Model ◽  
A Company

The aim of this study is twofold: the first goal is to systemise and summarise the models designed to measure the quality of financial statements, as these reports can form the basis of decision-making for the users. The second goal is to analyse the financial statements prepared by manufacturing companies acting in Baranya Country, from a quality perspective, applying the DeAngelo (1986) model and the modified Jones model (1995). Earnings quality is measured by the change in total accruals divided by total assets, considering a 4-years period of time between 2016 and 2019. Calculating the T-statistic, the amount of total accruals is a negative figure in the covered period. Consequently, it might suggest that managers make some decisions, which have a decreasing impact on earnings level of a company. Although the results of this study show some evidence of earnings management, further investigation is required in order to provide a more confident conclusion.

Does national ethical judgement matter for earnings management?

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Dante Baiardo Cavalcante Viana Jr ◽  
Isabel Lourenço ◽  
Ervin Lynn Black
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Ethical Issues ◽  
Accounting Standards ◽  
Ethical Judgement ◽  
Firm Level ◽  
Content Type ◽  
Management Actions ◽  
Country Level

Purpose This study aims to analyse the association between country-level ethical judgement and earnings management and the role that firm-level enforcement and the quality of accounting standards play in this association. Design/methodology/approach The analyses are based on a sample of 45,889 firm-year observations from 34 countries between 1998 and 2018. Based on the World Values Survey questionnaire, this study constructs a comprehensive index of the ethical judgement of each country. Findings The empirical findings suggest that firms from countries where ethically suspect behaviours are less acceptable are associated with lower levels of accruals-based earnings management and that firm-level enforcement and the quality of accounting standards dampen such association. Practical implications The results contribute to the debate about ethical issues in the accounting profession in an international context, adding to the sustainable development debate given that the creation of long-term value for firms is intrinsically related to business ethics and good quality financial reporting. Social implications When it is known that countries’ ethically-related judgements reduce the level of earnings management, actions can be taken by regulators and other stakeholders to build fairer societies with a more sustainable view, given that the quality of the financial reporting is inextricably linked to how income and wealth are distributed. Originality/value While previous literature documents that ethical judgement at both the individual and organizational levels matter as key determinants of the way managers are involved with unethical accounting practices, this study investigates the role of ethical judgement at the country level in explaining earnings management.

The impact of IFRS on earnings management: evidence from Mexico

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Lisa A. Eiler ◽  
Jose Miranda-Lopez ◽  
Isho Tama-Sweet
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Capital Market ◽  
Accounting Standards ◽  
The United States ◽  
Managerial Incentives ◽  
Income Smoothing ◽  
Content Type ◽  
Earnings Smoothing ◽  
The Impact

PurposePrior literature investigating the adoption of International Financial Reporting Standards (IFRS) finds that managerial incentives, capital market institutions and accounting standards interact to endogenously determine accounting outcomes. In this paper, we investigate the impact of changing from local GAAP to IFRS in 2012 on earnings management by public firms in Mexico. Given the institutional environment and managerial incentives in Mexico, there is not a clear theoretical prediction for the impact of Mexico's adoption of IFRS on earnings management. Thus, it is an empirical question whether a change in accounting standards had any effect on earnings management.Design/methodology/approachWe use three measures of earnings smoothing and one measure of upwards earnings management. Logistic regression analysis along with t-tests across two time periods, pre-IFRS (2009–2011) and post-IFRS (2013–2015) are used to determine if there is a significant change in the earnings management of Mexican firms, and if this change is different for companies cross-listed in the US and companies listed only in the Bolsa.FindingsWe hypothesize and find that adopting IFRS is associated with lower earnings management via earnings smoothing in Mexico, and the reduction is greater for firms cross-listed in the United States. Our results support the contention that strong institutions and enforcement aid in the implementation of new accounting standards.Originality/valueFirst, we contribute to the literature on the adoption of IFRS around the world. The consensus in the literature is that the impact of IFRS on financial reporting is country-specific. To our knowledge, we are the first to conduct such research on Mexico. Second, our findings indicate that IFRS adoption is associated with a reduction in earnings management through income smoothing by firms in Mexico. This contributes to a small but growing body of literature documenting consequences of improvements in Mexican capital markets. Results of research in this area provide important insights to capital market participants and regulators in Mexico.

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